HDFC Bank’s first quarter results at first seem to suggest all is well; with its net profit growing by 30.5% to Rs 606.1 crore. A closer look reveals that the bank’s core business is suffering from the after effects of the economic slowdown.
- HDFC Bank’s total interest income increased by 13% to Rs 4093 crore. Both interest earned on loans and income from investments grew at low rates.
- Other income –which includes fee income, commission, foreign exchange, derivative income and gains/losses on investments- grew by 75.6% to Rs 1,043.7 crore. It contributed nearly half of the increase in total income for the bank. Fee income, which contributed to nearly two-thirds of other income, grew by 27%. The main kicker came from profit on revaluation or sale of investments, at Rs 256 crore compared to a loss of Rs 77.6 crore in the June 2008 quarter.
- Interest paid out grew much faster than interest income, up by nearly 18%. Thus, net interest income grew by just 7.7% during the quarter. The bank said that this was driven by asset growth of 10.5% and a net interest margin of 4.1%.
- HDFC Bank reined in operating costs during the quarter, allowing it to grow by only 7%.
- But the slowdown has led to higher bad loans for the bank. Bad loans or gross non-performing assets shot up to over 2% of advances, up from 1.54% in June 2008 and 1.96% in March 2009. As a result, its provisions and contingencies’ figure nearly doubled to Rs 658.82 crore.
- The segmental business break-up shows where it is facing pressure. Income from businesses, known as wholesale banking, saw an 11.5% drop in the first quarter. Income from individuals, or retail banking, grew by 17.4% while treasury operations grew by 30.8%.
- Its capital adequacy is more than comfortable; at 15.4% compared to the required 9%. The capital adequacy ratio is a proportion of the bank’s assets (loans) that is set aside to meet any eventuality. In a sluggish environment, a high Capital Adequacy Ratio can be a drag on the bank’s return on assets. If the initial signs of a recovery get strengthened, demand for loans will go up. Interest rates too are forecast to increase after six months. The headroom HDFC Bank has now will prove useful then.